The Hartley Paper Company, owned and operated by Bill Hartley, manufactures and sells different types of computer paper. The company has reported profits in the majority of years since the company's inception in 1962 and is projecting a profit in 2003 of $65,000, down from $96,000 in 2002.

Near the end of 2003, the company is in the process of applying for a bank loan. The loan proceeds will be used to replace manufacturing equipment necessary to modernize the manufacturing operation. In preparing the financial statements for the year, the chief accountant, Don Davis, mentioned to Bill Hartley that approximately $40,000 of paper inventory has become obsolete and should be written off as a loss in 2003.

Bill is worried that the write-down would lower 2003 income to a level that might cause the bank to refuse the loan. Without the loan, it would be difficult for the company to compete. This could cause decreased future business and employees might have to be laid off. Bill is considering waiting until 2004 to write down the inventory. Don Davis is contemplating his responsibilities in this situation.

What are the facts in this case?

How does this issue affect the shareholders?

What are the alternatives?

What would be your course of action?